#1033 - Are Investors Too Bearish on China? ft. Shehzad Qazi | China's Economic Data & Property Problems

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0:37Are investors too bearish on China? Hi, everyone. Welcome to the Real Vision Daily Briefing. I'm Maggie Lake. With me today is Shahzad Qazi, the Managing Director and COO at the China Beige Book International. Hi, Shahzad. It's great to have you on again. Thank you very much. Great to be back. So we have had a couple of weak labor market reports. Today was weekly jobless claims here in the U.S., which seemed to suggest the U.S. economy may be slowing, may be keeping the door open at some point for the Fed to ease rather than hike. And that's been supporting stocks. Yields have been moving down for treasuries.

1:16At the same time, we had some news coming from China that exports were maybe a little stronger than expected. I'm interested to just start pretty big picture with you and find out what your assessment is of these two powerhouse economies. Where are we in this cycle for the U.S. and China? Yeah, I think starting with China first, you know, the Chinese economy has actually kicked off the year on a pretty solid footing and is doing much better than a lot of the investment community and analyst community would have had you believe at the beginning of the year or even late last year with how bearish they were.

1:52The U.S. economy, you know, not something I track very closely, but I have spent the last couple of weeks hanging around a lot of Fed economists and such. And let me tell you, the thing they're focused on is still bringing down that inflation level and only then looking at cuts. Their concerns vis-a-vis the economy, actually, at least as per my reading of the room, didn't seem to be particularly high. Yeah. I think you bring up a good point. We're in a situation where it seems like whether you're bullish or bearish, it's kind of the extremes, you know, or people seem to run from one camp to the other.

2:28And for both of these economies, maybe we're kind of a little bit more nuanced in the middle. So one thing that comes up, and I'm really glad that we are going to focus a little bit on China today, because we hear two different things, I think, are certainly coming from our community, the questions we get a lot, and they fall into roughly two camps. The bears say and worry about China still being in the grips of a bursting property bubble. The demographics for that long-term trend are terrible. So they just feel like the data coming out is not reliable, and they think things are worse than maybe China's letting onto the world.

3:10The bulls are looking at markets, stocks, especially ADRs that are really beaten down and kind of trying to pick a bottom. So those are the two sort of narratives we hear. Give us some insight into what you're seeing. Let's start with that property market situation. Where are the Chinese in terms of resolving that? Yeah, the property market, as far as our latest numbers are concerned, certainly remains in a lot of trouble. The housing market, which is really what everybody focuses on incorrectly, So it has seen a pretty substantial drop in sales, a pretty substantial drop in prices once again.

3:49And this painful story has been now continuing on for two years plus, for sure, really without a break, essentially. So you've got a lot of the challenges that remain. Now, what makes the picture even worse is that there has been policy support taking place over the last year plus, especially in the form of mortgage rates coming down, but that has not yet spurred the type of borrowing and property purchases from the household sector that would be expected or desired. That said, you are seeing now over the last week, for sure, the last few days, absolutely, and even the last couple of months, one set of announcements after another coming out from various cities saying they're pulling back on restrictions as regards to home purchases and approvals for even second mortgages and so forth.

4:41So my guess, I would say, my forecast is that we may very well see property finally find a bottom in 2024, a cyclical bottom. Structurally speaking, the sector is in a long-term restructuring. There's just no question about it. But cyclically, which is what matters a lot to the trading community, I think we might get a bottom this year. So a couple of questions on that. If we're talking about structurally, it's still being very difficult. Is that because of that demographic component I mentioned? There are just not enough people or not enough new households to buy up all the property glut that's out there?

5:20I think it's a combination of factors that is going to continue affecting the sector overall. Demand in the mid to long term is going to remain, I think, very, very questionable. And I think we may very well see, as you said, months or potentially some future periods where you just see consumers pull back, even if they finally go in, you know, into next year or so forth. At the same time, we also have to think about, we hear about the major Chinese developers that have gone under and are either defaulting or at a default risk. But there may very well be a second tier of Chinese developers, somewhat smaller, more regionally focused, that may still face financial difficulties into the future or may be facing financial difficulties today, but are just not getting the kind of coverage that the bigger names are.

6:09So we may have more pain ahead in the sector. And then, of course, the longer run problems that we've talked about, the demographic decline and so forth, the inability of the economy potentially to transition towards something that would be more consumer driven, which by definition means raising income levels and so forth, may continue to haunt the sector. And how are they doing with that? So that would be negative for property, but have they been successful in growing that domestic economy the way they had hoped? Because it sounds like they're still putting in place incentives to keep the property market moving.

6:48Yeah, they're trying to incentivize households to go back into the property market. They have announced very, very targeted and limited function, consumer programs like cars, cash for clunkers like program and trading in housing appliances and stuff for new ones, old ones for new ones. But those are very limited measures, and they're probably not going to be enough. The real thing China needs aren't these targeted programs. The real thing the economy needs is for the state sector to transfer resources and assets over to the private sector, for the private enterprises and SMEs to be able to go out there and borrow loans and not be crowded out by the large state firms that the government is so hell-bent on backing and supporting at the expense of the SMEs and at the expense of the private sector.

7:36Unless they're able to do that, they really will struggle to transition the economy. So, you know, we can talk about targeted measures and maybe even some short-term spurts to consumption, you know, because of that. But if you're talking about the long-term economic transition that they talk about and they're looking for, they've done very little to date to help that despite all the talk for the last several years now. Which is really important. Why are they so reluctant? Why do they continue to back the big state firms? And why are they so reluctant to sort of stoke the private market or to bring in those SMEs that you mentioned?

8:15I think there are two ways that we can decode this. The first one is that there seems to be a very strong ideological opposition from Secretary Xi downward, or at least among the top policy planners other than himself, of course, towards doing any type of consumer-focused stimulus policies. They certainly don't want to do anything akin to what happened in the U.S. in the aftermath of COVID, where we did stimulus checks and stuff. They've continuously derided that and referred to it as a social welfarism, as a negative thing. They don't like it, which, of course, would be ironic because most people don't associate communism with denigrating social welfarism, if you will.

8:56The second thing is I think this is where politics comes into play. For Secretary Xi, China being a powerful country is much, much more important. And the way he's gone about doing it is saying we are going to become the key producers of high-end technology and high-end manufacturing. The new productive forces, as he likes to call them, is central to our position in the world as one of the most powerful economies and countries. And what that has meant is, unfortunately, for the economy, I think in the bigger picture, doubling down on state-owned enterprises, letting them being the leaders in the manufacturing and industrial areas of the economy as far as these new productive forces are concerned and those industries are concerned.

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10:53Yeah, I have a question about that. But before, I'm just going to put a pin in that because I want to talk a little bit about that, the mix of growth. So if they are not stimulating, they're not getting that sort of domestic consumption, are we looking at a situation where they're going to look to export their way to growth again? That's absolutely part and parcel of the plan. I mean, Made in China 2025 was not just about indigenizing a lot of the key technologies and the technologies of the future as we talk about them, but also in most respects, whether it's EVs, solar panels, or green technology in general, batteries, etc., semiconductors, of course, becoming the key supplier, the key node in the global supply chains for these parts and equipments and products that are needed out in the Western world.

11:44So exporting is critical to that plan. You know, the complaints that Western countries have about Chinese overcapacity are absolutely correct. And the problem isn't just that there isn't enough domestic consumption. The production sizes are that large because the whole idea is to grab market share abroad. Yeah. So the question, and this has come up in conversations, and I think this is fascinating, um you know that was very much that fueled enormous chinese growth when they did it before and they came into the wto but there's a lot of a lot of speculation this time that europe and the u.s are not interested in that kind of global economy now where china floods markets with their cheap goods it's a very very different political environment uh and we know about the tensions between the u.s in China.

12:36We'll talk about that more in a moment as well. But, you know, there are headlines about Xi just going through Europe and it not going particularly well. The FT had a headline, Xi Jinping's unproductive European tour. Is the rest of the world more hostile to that model of growth for China? And what will that mean? I think ideologically, Western countries, given the political backlash, especially I think that we've experienced here in the United States, states of the so-called China shock has certainly led to a rethinking. That said, there is going to probably be, at the end of the day, a big gap between rethinking trade policy and rethinking the roles of tariffs and such in the economy, and then how ultimately they can be rolled out and how effective they are, given all the intermediating factors, starting from internal disputes among nations as far as the EU is concerned and among different politicians and parts of the government out here.

13:36That said, the bigger picture answer to your question is yes, of course, absolutely. I think the China shock 2.0 is the attempt is to avoid it. And China will not be able to probably get the type of boost to its economic growth from manufacturing and industrial to the industrial sector as it did the first time around, which is what I think factors into the longer run outlook for China, which is that the economy will continue to slow. It may still continue to derive an overwhelming amount of growth and revenue and so forth from the industrial sector in this way, not the old format of construction and so forth.

14:18But overall, China's economy is going to continue slowing down for sure. So it's probably worth asking, they have a 5 % growth target. Does that seem attainable? I think growth will probably undershoot that in reality. They're claiming that they will outrun last year's growth by just a hair. I think that's a bridge too far for me. This year, I think we're not talking about a growth slowdown per se. I think the economy will continue to grow, but can they be coming out of a very clear recession here? I don't think so. So we have a robust conversation happening on the chat on our platform, including a chat poll, which Paul put up.

15:00Thank you, Paul. Hopefully you weigh in. Brian, maybe you want to do one on YouTube, if you can, and find out how people are feeling about China and the outlook for China. So we did also get a question, which was on my mind as well, and that's about foreign direct investment. Theo asking, do you see FDI going back to China, or will they all go S &P 500, India, and others? You know, FDI, obviously, as the viewers know, has fallen quite significantly over the last - Foreign direct investment, I should say, for those who may not be familiar with the acronym. Go ahead. Yeah, exactly. I mean, foreign direct investment in China certainly has been falling as of late for a variety of reasons, including the fact that companies have been very suspect about the health of the Chinese economy, and to an extent correctly so, although as I've said before, I think too much of an overcorrection in terms of just how weak the economic condition on the ground there was.

15:57That said, do I foresee a recovery? Probably a little bit of a recovery in those figures compared to the last couple of years that have just been sort of historically bad. I think it's in the books, you know, probably 2024, 2025 may see a little bit of an improvement. But I don't know if we go back to the type of blockbuster FDI figures that we were used to pre-trade war and even into the first couple of years of the trade war. COVID really shifted that landscape a lot. And then the trade war setting in new and potentially new rounds of trade tariffs that are in the works, you know, we'll probably continue to put downward pressure on that.

16:36Does China need that foreign direct investment? And we know some of it, you're right, was not only the chill from all that you talked about, but also the crackdown on technology companies, China seeming to move away from this, you know, sort of hybrid embrace it had of some sort of state-sponsored capitalism, and just so much uncertainty about the market, and then really putting their hand on the scales of those domestically grown companies. But do they need it? Can they, I don't want to say survive this way, but what's the balance for China? Because that seemed like it was a really important element for their economy, and it did help fuel growth.

17:17Can they do it themselves without the foreign direct investment? I don't think China necessarily has a shortage of capital problem. That said, the real question is they would love nothing more than foreign capital coming in. As a matter of fact, if you listen to Xi speaking all over the last six months or so, if not more, as a matter of fact, a lot longer than that now, all of last year, there was this talk of welcoming foreign investor in the year of the foreign companies and foreign investors and so forth. So they certainly would love nothing more than American and European capital flowing into Chinese companies.

17:53It's where they want the capital to go. And they want the capital to go towards those high end manufacturing areas that we discussed, the cutting edge technologies that are so critical to their national ambitions. That's exactly where they want the money to go. And I think a lot of intelligent people in Washington, D.C. understand that, which is why there has been this push to get the administration to get really serious about outbound investment restrictions. The argument being we need to stop American private equity firms and other asset managers from putting their money into cutting-edge technology companies in China, which may ultimately be used by the PLA and so forth, the argument goes.

18:34And of course, the Communist Party very much understands that and doesn't like those policies, as you can imagine. Yeah. When we're talking high-end manufacturing, we tend to think chips, right? Because that's where the political focus has been, chips and sort of computer-related technology. But does it extend to other parts of technology? Should we be thinking and talking about AI or biotechnology or pharmaceuticals? What are the areas that they're really concentrating on? I think all of the above, quantum computing, AI, these are certainly it. Pharmaceuticals are certainly a big component of it.

19:14So all of these, which have been listed and stated, not only in the old Made in China 2025 plan, which despite the name going away, remains very much alive and well. But even the five-year plans that the party puts out and Beijing puts out, you can see these industries being listed there. So one thing which is very clear is that the Communist Party and the government's really all the same thing, don't shy away from highlighting exactly what sectors are important to them. So there's no secrecy about that. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

19:57A lot of speculation and attention on the Chinese currency. Do you expect to see a devaluation of the yuan? It's two-pronged. What are your thoughts on the Chinese policy approach to that? And then what do you think will really happen in terms of market forces? Yeah, I think obviously there's been a ton of chatter over the last few weeks about this idea that China is getting ready to do a big devaluation of their currency. And the view of our team is, no, that's not going to happen. Including the fact that some of the arguments being made for devaluation that they've bought up a bunch of commodity and stuff.

20:38It's actually historically not true. In the past, when there has been a devaluation, commodities prices have actually gone down. And so the deval didn't really help them at all. But we also have to remember that China is under the spotlight right now with regard to these accusations, and they are correct, of oversupply and dumping, essentially is what I'm going to call them, in international markets of their goods. So a devaluation would look like an outright desire to do so and to do so at a much faster pace. We're in an election year here in the United States. They know very well that there is a 301 investigation, or rather I should say a 301 review that is currently in place to see if There need to be additional tariffs on Chinese product settings on which we already have tariffs.

21:24Certain new industries like EVs are now being considered for potential new tariff policies and so forth. So the geopolitics of it all and the domestic political scene, et cetera, et cetera, don't really make for a very robust argument for why Beijing would today choose to do an outright devaluation. That's an excellent point because it's only going to get worse as we head toward the U.S. election. Do you think we will end up in a trade war with China? Is that a risk that we should assign a probability to? You know, in the past, we sort of say it's political rhetoric. Cooler heads will prevail.

21:59Countries need each other. They'll work it out behind the scenes. But, you know, the relationship seems to have deteriorated. And both candidates are talking really tough on China. Do we need to assign risk to that actually happening? I think so. You know, our in-house view is that 2025, you get a second chapter in the U.S.-China trade war, regardless whoever is president. We are already talking about steel and aluminum tariffs coming on, additional ones, which are more of a political motivation. But if we do get tariffs, you know, where it could really have an impact, you know, we're talking about EVs potentially, some green technology, solar panels possibly.

22:43and that sort of thing. So I think there's a trade war coming, whether it's a Biden presidency or a second Trump administration. That's concerning. Is China making headway? So we know there's difficulty about sort of and resistance from Europe and the US about China flooding or really ramping up the export game and flooding markets. What about the rest of the world? We know China's really been trying to deepen its ties with Southeast Asia, parts of Africa, but especially Southeast Asia with that sort of young demographic there of potential consumers? Yeah, I think, you know, as far as the developed world is concerned, China runs large trade surpluses with many countries, including other developing and low-income countries as well, who are also on the receiving end of China's, dumping practices by and large.

23:44And if you talk about other emerging markets, we have, for example, this year already seen Brazil complain about the fact that they think China is dumping steel. The Chileans have actually just put temporary six-month long, I believe, tariffs on Chinese steel as well. So you are seeing some amounts of trade remedies and trade complaints coming out of the emerging or developing economies or emerging markets as well. Yeah, that's so interesting. And that would complicate things for sure. Okay, we have so many good questions. I want to get to them. Paul, you're going to give us the results of your poll when you get enough answers in.

24:25And just before I do that, if you are watching on YouTube, I'm taking the questions from the platform because that's where I look. So if you're not on the platform, come on the platform. If you want to ask a question and participate in the chat, if for some reason, and see some of the good, um, information they're sharing as well. If for some reason, YouTube is the place you have to watch for, for whatever reason, um, then certainly feel free to give us a like and subscribe to the channel so that we can keep track and know you're there and, um, and keep our eye on you there as well. Um, okay. So let's start with Roger is asking, this is circles back on something we talked about.

25:05My biggest concern for China is the demographics. I will say that the conversation happening in the chat, Chazade, I think very smartly is China short term, China long term, which is what you referenced at the start. So you kind of have to think of them that way. This, I think, falls into the long term concern. um what is the situation with demographics in in china is it as dire as we are led to believe it is it is very dire there's no question about the fact that you're looking at a green economy you're looking at a demographic decline you're looking at we've had a statistics come out where showed negative population growth recently and so forth um this is why the communist party has been urging people to not just have two kids, but have three kids.

25:51Here is where they're running into trouble. People are not going to get married before they get good jobs. People are not going to potentially get married because of some cultural reasons, maybe before they even own property, which either they can't own property because they already paid for a house that they've been waiting on for several years, or they can't own property because they're too nervous to go into a market where prices seem to have just keep falling month after month after month. So why in your right mind would you want to go and buy something when your asset value is going to go down?

26:21And all these things are impacting their ability to grow family sizes to try to push back a little bit on that demographic decline problem. So China's economic and social problems, societal problems are unfortunately for the Communist Party intertwined in this manner. And this all in the long run will contribute towards that slowing economic growth story that everybody acknowledges, including the Communist Party themselves. The change can come if they do what a lot of advanced economies do, which is have an immigration policy. Go out there and look for folks from different countries who want to move to China and work in China and supplant their labor force, that shrinking labor force with immigration.

27:06Who knows if that will ever happen? Well, we can list a lot of reasons that why that might have to work on the sales pitch on that. But when you're talking lifestyle, personal freedom, climate, a lot of other issues. But to your point, that that would be a solution. Ralph is asking, I think that the fact that they're facing this demographic time bomb is what some people call it. It sounds like it's not too far from that, is that they will be that will lead them to be somehow lead China down the road to conflict. I think that's what the concern is. just their inability to grow the economy and concerns about social unrest domestically may make them more willing to participate in some sort of military action.

27:52I mean, that's a long, there's a lot of ifs in that jump. I'm just giving voice to those who are, I would maybe describe as China hawks, who are very concerned about the prospect of that. But Ralph is asking, where do you think the India-China border clash will end up? What's China's relationship with India? So I should confess, I'm not the biggest India-China expert around. But we know, of course, that they have a very complicated relationship where China happens to be one of India's largest trading partners, I think in certain years, as a matter of fact, the largest. It could be. Somebody should fact check me on that.